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Auditing Your Aircraft Management Company

Finding the right management company, and getting the most out of that relationship, requires careful consideration and involvement by the aircraft owner.

The traditional in-house flight department business model, with pilots and mechanics employed by the company, has worked well for decades. But over the past several years the number of aircraft management companies has grown as some aircraft owners have opted to let outside vendors deal with the complexities of overseeing flight operations.

A management company can spare an aircraft owner from worrying about details like crew schedules and compliance with Federal Aviation Administration (FAA) regulations. But Gil Wolin, a veteran of more than 30 years in business aviation, says that as an aircraft owner “you need to educate yourself in some way so you can ask the right questions.” Wolin, the principal of Wolin Consulting, which is based outside Boston, recommends that the aircraft owner should have a face-to-face meeting with management company officials to review their business relationship “at a minimum, at least once a year.”

In many instances aircraft owners will retain the services of an experienced business aviation consultant to help direct that annual audit. Dave Weil, the CEO at Flight Dept Solutions, LLC in the San Francisco Bay area, says, typically there are two areas of focus: operations (including safety issues, flight operations and maintenance) and administrative (invoicing, cost-control policies, insurance and compliance with FAA and Internal Revenue Service requirements).

It‘s All in the Details

Deborah Bew, who heads Aircraft Acquisitions, Inc. in Durham, NC, says some owners are more focused on keeping costs down, pushing management companies to provide more detailed financial statements. She believes that aircraft owners should avoid signing “boilerplate” management agreements, instead insisting that contracts are tailored to address their concerns and interests.

Bew, whose business helps clients find the right aircraft to meet their specific travel needs, develops detailed trip analysis matrixes to guide that process. She encourages similar attention to detail by owners in selecting an aircraft management company. Does the management company have management experience with your type of equipment? Is the management firm‘s approach to best practices and safety management systems consistent with the owner‘s philosophy? Will the owner‘s aircraft be operated primarily under Part 91 or Part 135? Will most trips be domestic, or does the owner plan to fly extensively outside the U.S.?

When auditing a flight management company, Weil says the owner should have someone knowledgeable about operations and maintenance issues talk directly with the pilots and mechanics who are flying and working on an aircraft. What policies and procedures does the management company have in place? Is a safety management system used to ensure adequate risk analysis and mitigation? The person conducting the audit should ask the same questions of multiple management company employees and attempt to “get a feel for the overall [safety] culture,” he said. “Everybody says safety is the most important thing, but that is not how all operations are run,” Weil observed.

On the administrative side, the person conducting a management company audit needs to review the contract the aircraft owner signed to determine if the management company is delivering what it promised. Invoices should be reviewed to ensure they not only reflect compliance with the contract but also to see if costs are reasonable. Insurance provisions should be checked to make sure the owner‘s property is adequately covered, and that the owner is shielded from liability in the event of an accident.

Review Agreements Annually

Even though an owner may be generally satisfied with the performance of an aircraft management company, the annual audit is still a valuable tool in the communication process between the company and client and helps address changing circumstances.

One example of important governmental change mentioned by Wolin, Bew and Weil could significantly drive up costs for management company clients. An advisory opinion this spring by the chief counsel of the Internal Revenue Service (IRS), says that when an owner retains an aircraft management company, he is contracting for transportation services, which may be subject to the 7.5 percent federal excise tax on air transportation, even if the aircraft is being operated under Part 91. The result could be a 7.5 percent hike in the owner‘s expenses, Wolin said.

“It‘s a nightmare,” Weil said, warning “that‘s how a lot of the IRS auditors are interpreting it and conducting their audits right now.”

There are things that can be done in drafting a management contract to lessen the likelihood an IRS auditor will take that approach, Weil added. There is “a huge emphasis now on who controls the pilots.” The IRS is saying that “if the owner has control over the pilots, it‘s less likely that the management company has operational control, and thus less likely that the excise tax will be owed,” Weil said.

Specific contract language can be added to more clearly indicate the owner is in control of the pilots, he said, such as having the pilots sign an “agency agreement” stating that even though they are W-2 employees of the management company, they are acting as agents of the owner. But that is something that is not typically included in a standard management agreement, he said.